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J.C. Penney Has a Date With Destiny -- and Court

Retailer just can't seem to make a clean break from Martha Stewart.

Department store retailer J.C. Penney(NYSE:JCP) seems unable to escape the grasp of domestic diva Martha Stewart, as it's being hauled back to court after a report by the New York Post suggested it was ending its contract with the home goods retailer. It just may work out in the end after all, though, as the judge has scheduled a hearing for Sept. 25 to hear about this latest development.

He's about to hand down a ruling over Penney's selling wares from Stewart despite exclusivity agreements she has with Macy's(NYSE:M), and this reports might color what he decides.

Penney's got caught up in the crosshairs of the legal system after purchasing a near-17% stake in Martha Stewart Living Omnimedia(NYSE:MSO) as part of former CEO Ron Johnson's bid to remake the retailer. Out went regular doorbuster sales; in came low, everyday pricing. Stores-within-a-store, separated by brand, became de rigueur. It would be stealing a page or two from Apple's successful branding strategy, which Johnson knew so well since that's from where he came, with trained personnel giving out tips and advice.

Of course, we know how this story played out. Almost from the get-go, shoppers who had once been loyal to Penney's left the retailer in droves, heading instead to Macy's and rival Kohl's. Sales at the department store chain plunged from $17.8 billion in 2010 to under $13 billion last year. They're down another 22% over the last 12 months from the same period a year ago as consumers voted with their feet that they didn't like not having sales. It didn't matter that they were actually saving money under Johnson's plan; shopping isn't always a rational decision, and the idea that they thought they were getting a better deal with blowout sales mattered more.

It also didn't take long for Macy's to weigh in on its deal with Martha Stewart. Following the diva's release from jail for insider trading, Macy's took a risk in 2006 and spent a lot of money rehabilitating her image with an exclusive deal to sell her home goods. It sued Penney's -- and then Stewart -- for violating the exclusivity arrangement, even though Penney's items weren't the ones covered by the contract. Macy's said: Doesn't matter, exclusive is exclusive.

Earlier this year the court gave Penney a partial victory, saying the retailer could temporarily continue selling Martha Stewart's stuff, but couldn't identify it in any way, shape, or form as being related to her. So as I asked at the time, why bother? If it's the same cookware and stuff already being sold under the Penney brand, why spend the money for a branding contract you can't benefit from?

Another fallout from the makeover debacle was Johnson losing his job to turnaround specialist Mike Ullman, who apparently agrees with me, and reportedly is set to ax the agreement because of poor design, sales, and general ennui. Since the Post's report was based on unnamed sources, it's said the judge who has been presiding over the lengthy non-jury trial wants to know if it's true, because it may affect his ruling.

That could mean the penalties for having violated the contract won't be as severe since it will become a moot point, but the judge could just as well be irked at having wasted several years of time and resources to decide a case that's getting resolved anyway.

The biggest loser might just be Martha Stewart, who, despite saying she's still a Penney partner, obviously has the clock running down on her, and Macy's can't be all that pleased at how willing she was to dilute her agreement with them.

Regardless of whether it's good or bad for Penney's, the outcome will close another sad chapter in the storied history of a once-venerable retailer that still faces the difficult task of restoring its own good name with both the public and the financial markets as it tries to stave off catastrophe.

J.C. Penney's stock has lost more than half its value over the past year and some 80% from its all-time high reached just before the recession. Despite cloying ads apologizing for its missteps, shoppers haven't returned and sales last quarter were down 12% from last year, though that's slightly better than the 16% drop the quarter before.

The retailer can only hope the judge gives it a gift that finally allows it to escape the diva's clutches and to continue to repair its good name.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.